Friday, 27 April 2007

You know houses are overvalued when.....

....when house prices increase at a much faster rate than wages. On Tuesday, the Office of National Statistics (ONS) said that UK house prices had risen by 204 percent in the past decade compared with a 94 percent increase in average wages.

It is an obvious point, but houses are financed by mortgages, and people pay mortgages with their wages. If houses are rising at twice the rate of wages, then there are only three possible ways that people can keep buying houses: a) economizing on non-housing expenditure, b) running up additional debt, or c) running down their non-house wealth. None of these methods are sustainable in the long run.

The bubble may have a few more months left to run, but the end is in sight. Prices will first slow, then flatten, followed by a falter. The slight dip in prices will be first greeted with denial. There will be much talk about "prices resuming their upward trend". However, as the recover fails to materialize, unease with creep in, followed by fear and then panic.

Watch for the buy-to-let market. It is here that the panic will be start.